A new wave of bankruptcy filings for leveraged oil and gas companies has begun and this time it may involve more prepacks and less optimism. Beginning in late 2015 and continuing through 2017, downtown Houston was filled with bankruptcy lawyers. Highly leveraged exploration and production (or E&P) companies had become crippled by falling oil prices and the resulting impact on the value of their producing and non-producing reserves in their borrowing bases. No one was immune from the effect: servicing companies, suppliers and vendors, mid-stream and up-stream alike, all operating in a changed market. Many of these borrowers, however, anticipated a near term upswing in the price of oil and commenced their chapter 11 cases with that in mind. For a period of time, they were right. In 2018, WTI Crude recovered above $60 per barrel and reached the mid-$70s as many oil and gas companies exited bankruptcy with improved balance sheets. The volume of oil and gas company bankruptcies declined dramatically from 2016 to 2018. But it didn’t last.
At a time when the S&P is flirting with all-time highs, energy stocks have fared poorly and the private equity markets have largely closed their doors to energy companies. In part due to continuing uncertainty associated with trade wars, WTI Crude is back in the mid-50s as recently as this week as inventories continue to grow. Formerly explosive growth in China, the world’s second largest oil consumer, has slowed. Even the massive disruption at Saudi Arabia’s Aramco processing facility had only a short-term price effect. Indeed, recently Schlumberger took an approximate $1.6 billion write-down due to what it described as a slowing fracking industry. Absent some considerable tightening from OPEC, supplies are expected to grow. 2019 has already seen bankruptcy filings by oil and gas companies Murray Energy, Weatherford International, Sanchez Energy, Vanguard Natural Resources and a “Chapter 22” by Halcon Resources (its second filing). It is reasonable to expect the trend to pick up steam as we close out 2019 and head into 2020. Fall redetermination season will likely show reduced borrowing bases for E&P companies, and debt maturities are now within sight, with nearly $140 billion coming due in the 2020-2022 time period, according to S&P. The warning signs are flashing.
The last wave of oil and gas bankruptcies evidenced borrowers’ expectations of a short-term drop in commodity prices. Many E&P companies drew on their reserve-based loans before redeterminations negatively impacted their borrowing bases and availability. These borrowers entered bankruptcy without the need for debtor-in-possession financing – they largely avoided pre-arranged deals with their lenders, instead hoping to forestall their creditors as prices normalized, surviving on their massive cash hoards. The next wave of bankruptcies should be different. Without the reasonable expectation of a near-term return to profitability given market dynamics, and without access to sufficient cash to weather an adverse filing, borrowers will pursue pre-arranged (and pre-packaged) Chapter 11 cases. In these cases, companies will reach agreement with major creditor constituencies on the terms of a restructuring before commencing the filing. This often leads to quicker, less expensive proceedings. In anticipation of a coming bankruptcy wave in the oil patch, anxious creditors should be monitoring their exposure and taking any steps available to improve their position and bolster their influence. This may include lenders leveraging any opportunity to tighten their covenants, and reviewing and enhancing their collateral packages, among other things. Vendors and suppliers may wish to revisit their commercial trade terms to the extent practical and consider the availability and extent of statutory liens.